LOOKING AT THE OPTIONS
in this article:
See your specialist franchise banker as an ally, says Daniel Cloete of Westpac
Obtaining bank finance might seem to be a big issue, especially for first-time buyers of small businesses. While it’s understandable that you might be nervous about starting a business, especially if you are borrowing against your home or other investment, funding and financing are a normal part of business life.
Getting the finance is a straightforward process that uses the same information you will need to assess the business yourself. You should therefore consult a specialist franchise banker at a reasonably early stage and see them as an ally who has your interests at heart. A good specialist already knows most of the franchises available and can quickly see if franchisors’ claims (like income or expenses) are realistic. They can also offer different funding structures to make the best use of your equity, and may have the ability to partially fund against the franchise business’s cash flow.
This does not mean you should not do a proper assessment yourself. Your bank is going to expect you to have an intimate knowledge of the business that you are planning to buy and its financial position or prospects. This is in your interests, too: by doing your own research and using experts like franchise accountants and lawyers to do the specialist work, you can increase your chances of finding the right business to suit your needs and ambitions.
One thing that any potential franchisee should remember is that it is in the bank’s interest that its clients join a stable, profitable franchise system without paying too much for the business. After all, it’s the franchisee who is going to be the bank’s client – not the franchisor!
So what information does a bank require to process a prospective franchisee’s application quickly and effectively? Here’s a brief guide to some of the major areas.
The Proposition. The bank will want to see a breakdown of the purchase price of the franchise and factors like details of the franchise location and demographics of the area if applicable. It will also look at the buyer’s own financial position.
Business Plan. Producing a business plan is a very worthwhile exercise; it will help you to understand the business you want to purchase better, focus your thinking, and convince the franchisor and financier of your abilities. A business plan need not be elaborate but should include an explanation of how you plan to run the business; details of who will be operating the business (yourself, manager, family members) and their abilities; working capital required; information on the market environment; and background on the specific franchise under consideration.
Cashflow Projection. A bank typically needs a 12-month cashflow projection for the proposed business, including a list of the assumptions used to determine the figures.
If the business is an existing one, it will also want to see the historic financial accounts for up to three years. In the case of a new franchise, the franchisor may provide cashflow projections based on expectations and on what other similar stores in the system are doing. These are not guarantees, of course, but if the franchise has a good track record, it can give a good indication of possible performance.
If done properly, and with input from a specialist franchise accountant, a cashflow projection will tell you about the real value of the business as well as how much bank finance you need to obtain.
Your Finance Request. Getting the finance you need isn’t just about asking for a loan. To maximise the returns on your business investment, you want to borrow only the right amount of money, only when you need it, and always on the best possible terms.
Different needs can be financed in different ways: for example, short-term working capital via overdraft, medium-term business finance via a term loan; funding equipment or vehicles via equipment finance (this is usually preferable to leasing as you end up owning the item, enjoy the same tax benefits and can use the item itself as security). In determining the best mix for your individual needs, the bank would look at the term of your franchise agreement, the debt servicing capabilities of the business and the particular needs of the industry.
New business owners often ask, ‘How much can I borrow?’ This is actually the wrong question: the right question is, ‘How much can the business afford to repay while still allowing the owner a decent living?’
Neither you nor your bank would want your business to fail because you had borrowed more than it could afford to repay. Interest rates are at a historic low at the moment, which could easily lull you into taking on more debt, so you want to look at what happens to your calculations if interest rates rise during the term of the loan. Remember to consider any tax implications in making the calculations – this is another area where the advice of an accountant is vital.
The bank will also look at how much money you are prepared to put in yourself; the security you can offer; your financial record of accomplishment and business acumen; and other factors if applicable.
In certain exceptional cases, with proven franchise systems where the equipment or stock lends itself to this approach, they may also lend against the value of the business itself. This can reduce the total security required but, because of the many variables involved, it will be judged on a case-by-case basis.
Before committing yourself to any purchase, you should determine how much finance you require and involve your banker in the decision-making process on the required amounts, terms, timing and mix of financial solutions that will best meet your needs. Remember:
• Your bank values your custom and wants to make it as easy as possible to obtain finance for the right business.
• The information that you need to assess the viability of a business opportunity is the same that the bank needs to process a finance application. Get the information, do it once and do it right. Use expert advice where necessary.
• In obtaining finance, you are entering into a long-term financial relationship with your franchise banker built on trust. This makes it important for the bank to look after your interests.
• Look at the services and added value that your bank can offer over the longer term after obtaining finance. You are in this together for the long haul. Informed relationship banking can make a huge difference to the eventual success of your business.
The information contained in this article is intended as a guide only and is not intended as an exhaustive list of matters to be considered. Persons entering into franchise agreements should seek their own professional legal, accounting and other advice.
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This advertorial is taken from Franchise New Zealand magazine Year 24 Issue 4
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